In the fast-paced world of business, contracts are the backbone of commercial relationships. They define rights, obligations, and remedies, and serve as the primary tool for risk allocation. Contracts are also a key driver of business value. Failure to appropriately document business relationships in well drafted contracts creates uncertainty as to a business’ rights and obligations vis-a-vis third parties; valuators are likely to take a cautious approach in light of such uncertainty and will likely undervalue a business in these circumstances. Yet, despite their importance, many businesses underestimate the complexity of contract drafting and negotiation. Engaging legal counsel is not merely a formality—it is a critical safeguard against costly disputes, unintended liabilities, operational disruptions, and value suppression. This article explores the key risks associated with poorly drafted contracts and highlights why legal advice is indispensable throughout the negotiation and drafting process.

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1. Risk of Unintended Verbal Contract Formation

During negotiations, parties may exchange emails, draft term sheets, or engage in verbal discussions. Without clear documentation that negotiations are “subject to definitive agreement” or otherwise intended to be non-binding, courts may find that a binding contract was formed prematurely.

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Lawyers help manage this risk by drafting non-binding letters of intent, including disclaimers, and ensuring that all communications reflect the parties’ intent to be bound only upon execution of a final written agreement.

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2. Risk of Inadequate Party Identification

Misidentifying parties—such as using trade names instead of legal entities—can render a contract unenforceable or create confusion over who is bound. This is especially critical when dealing with corporations, partnerships, joint ventures, or trusts, where authority to bind the entity may vary.

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Legal counsel ensures that parties are properly named, their legal status is clear, and signatories have appropriate authority. They can also advise on the production and execution of ancillary documentation that can be used as evidence of a party’s intent to be bound by a contract, such as corporate, partnership, or trust resolutions, as may be applicable.

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3. Importance of Termination Provisions and Procedures

Termination clauses define how and when a contract can be ended, whether for cause (e.g., breach, insolvency, the occurrence of some event or condition) or for convenience. Poorly drafted termination rights can leave a party trapped in an unfavorable agreement or exposed to abrupt termination without recourse.

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Lawyers structure termination clauses to reflect the parties’ commercial realities, including notice periods, termination fees, post-termination obligations (e.g., return of confidential information, wind-down or sunset periods where immediate termination is impractical, etc.), and survival of key provisions like indemnity, limits of liability, and confidentiality.

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4. Risk of Overbroad Indemnification Provisions

Indemnification clauses allocate risk by requiring one party to compensate the other for losses arising from specific events, such as breach, negligence, or third-party claims. However, when drafted too broadly—using language like “in any way arising out of” or “directly or indirectly related to”—these provisions can expose a party to liability for actions beyond its control, including those of the other party or third parties.

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Legal counsel ensures that indemnity obligations are appropriately scoped, limited to the indemnifying party’s own conduct, and exclude categories such as taxes or unrelated litigation. Lawyers also help define procedural safeguards, such as notice requirements and control over defense and settlement, which are vital to managing indemnity risk.

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5. Risk of Inadequate or Inappropriate Limitations on Liability

Limitation of liability clauses cap the financial exposure of parties in the event of a breach or claim. Without careful drafting, these clauses may fail to expressly exclude or include consequential, incidental, or punitive damages, as would be appropriate for the circumstances, or may be rendered unenforceable due to ambiguity or inconsistency with other contract terms.

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Legal professionals tailor these clauses to the transaction, ensuring clarity, enforceability, and alignment with indemnity provisions. They also carve out exceptions for fraud, willful misconduct, or breaches of confidentiality, where unlimited liability may be appropriate.

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6. Risks of Failing to Document Intellectual Property Ownership

In transactions involving Intellectual Property—such as software development, branding, or creative services—failure to document ownership can result in disputes over rights, royalties, or infringement claims. Under Canadian law, for example, copyright created by an employee may belong to the employer, but contractors generally retain ownership unless they are specifically assigned.

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Lawyers draft ownership and licensing clauses that clearly delineate rights, address pre-existing materials, and include necessary assignments and waivers.

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7. Risk of Representations and Warranties Becoming Unintentionally Binding

In the absence of an “entire agreement” clause, pre-contractual statements—such as sales pitches, marketing documents, verbal assurances, or informal promises, which are not specifically included in the contract—may be deemed part of the contract. This can lead to disputes over alleged misrepresentations or attempted reliance on and enforcement of terms that were not intended to be legally binding.

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Properly drafted entire agreement clauses prevent this by stating that the written contract supersedes all prior communications. Legal counsel ensures this clause is robust and includes a “no modification” provision, requiring written amendments signed by both parties.

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8. Missing or Vague Boilerplate Provisions

Often overlooked, “boilerplate” or “general” provisions—such as notice requirements, assignment rights and restrictions, governing law and forum, and dispute resolution—play a crucial role in contract enforcement. Their absence or ambiguity can lead to confusion as to the practical application of the contract or to forum shopping (the practice of enforcing a contract in a jurisdiction with laws favourable to the complainant), or result in obligations becoming unexpectedly unenforceable.

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For example, failing to specify acceptable notice methods (e.g., excluding email due to reliability concerns, or contemplating the outcome if mail is sent during a strike or other labour shortage) can lead to questions as to whether critical communications were delivered properly, which could be the determining factor in whether a party is permitted to exercise a contractual right or is barred from doing so. Similarly, omitting a governing law clause may result in unpredictable legal outcomes where the laws of different jurisdictions treat a particular matter differently, and failing to confirm the parties’ rights and obligations with respect to assignment of their interest in the contract can result in unintended restriction on assignment or unwanted assignment of contractual rights to third parties. Legal counsel ensures these provisions are comprehensive, consistent, and tailored to the parties’ needs.

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9. Additional Considerations

The above is not a comprehensive list of issues that should be addressed by a professional when contracts are being drafted or negotiated. The circumstances specific to each commercial matter will give rise to practical and legal considerations unique to the subject transaction. A commercial lawyer can identify such considerations and provide guidance to ensure the contract is appropriately tailored so that key issues are addressed in a coherent, unambiguous, and legally binding manner.

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Conclusion

Contracts are not just legal documents—they are strategic tools that shape business relationships, allocate risk, and preserve value. The risks of proceeding without legal advice are significant: enforcement of unintended legal obligations, exposure to unforeseen liabilities, unenforceable terms, and costly litigation. By involving legal counsel early in the negotiation and drafting process, businesses can ensure that their contracts are clear, enforceable, and aligned with their commercial objectives.

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In short, legal advice is not a luxury—it is a necessity.

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The above article is meant for informational purposes only; it is not legal advice and should not be relied on as such. Readers should seek legal advice specific to their circumstances prior to executing a business contract or agreement.

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